Another FB is a mortgage 'insiders' view on the lending industry, the housing bubble, and the loose credit standards that drove it all. This site is dedicated to educating people on how to make good financial decisions and not become another F@CKED Borrower (FB)!!
Many of these bwrs had NO business getting a loan...but lax underwriting standards, low rates, stated income, interest only loans, option-ARMs, neg-am's, no-doc loans, and more, made this froth/bubble possible.

Wednesday, April 19, 2006

Car wrecks and the housing bubble?!?!?!?

I know, I know...people want me to post more often. Well, I hope to post more frequently when I stop 'drinking from a fire hose' with my new job. That said, things are going well with the new job...and things are starting to fall 'in line' with what I thought would happen with this bubble. I still feel like I am beating a dead horse. This bubble should NOT be a surprise to anybody.

Look at it this way: if you give a 16 year old kid the keys to a new Porsche Twin Turbo, what are the odds that he will 'over extend' the speed limit a little bit? How cool will he look while he cruises past everybody by barely pressing his right foot? How will the novice handle that car when he is no longer on the perfect straight road and encounters the first curves and bumps in the road? Will our novice panic...what will they do? How will our 'novice' handle the car with little to no real experience in a vehicle like this? What are the odds that the novice driver crashes that car? Sure, I know that not every 16 year old that gets the keys to a fast car ends up wrecking it...but it shouldn't come as ANY surprise to anybody when it DOES happen. (as I was typing this, there was a news story about a teenage driver that lost control of his Mercedes Benz on the 56 freeway and launched 100ft down an embankment through a fence and into a residential yard.)

The same thing applies to this 'liquidity bubble' that manifested itself in the housing market by way of the mortgage business. You have a bunch of financial 'novices' getting mortgages that allow them to 'over extend' a little bit so they can get into a house or condo (interest only, neg-am, option-ARM, stated loans, etc.). Many of these people were real 'cool' as their house shot up in value with little to no effort on their part. Then there were a few bumps in that 'perfect' road to riches that started popping up. Just like no road stays straight forever, nothing appreciates in a straight line like real estate has the past 5-9 years depending on where you live.

Just look at the numbers coming out of Orange County today. You can check out the numbers for yourself, but just notice that sales are way down from last year, and that inventories are up pretty much across the board (not on the chart). Note: don't let the 22% down payment figure fool you. DataQuick doesn't know if the 20% down payments were cash, equity from another house, or a 2nd mortgage. With the proliferation of 100% or 80/20, 80/10/10 financing, it is easy for me to speak from experience and surmise that the average 'homeowner' is not putting down 22% in cash, but rather using piggyback second mortgages. It is harder to track Orange County on ziprealty.com than it is San Diego because it lumps OC and LA together. But you can look at San Diego and see that they are about to go over 19,000 properties on the market. Just remember, when everybody was 'cruising' to easy riches, there were 2900-4000 properties on the market.

So, rising inventories is the first 'bump in the road' that people are experiencing. This doesn't really show up on most peoples radar screen. Again, most of these people are novices and have very little knowledge of the real estate industry or the mortgage that is driving their real estate riches. Even if people know that their ARM will adjust, or that they can't make the minimum payment on their option-ARM forever, they have no idea the ramifications of these decisions in a market that doesn't always go up.

Here is a perfect example of the nonsense that illustrates why there is a bubble and why prices HAVE to come down.--------------- List Price: $469,000 - $469,000ZipRealty will give you up to $2,814 cash back.*

DescriptionPerfect opportunity for an investor! This stunning unit is rented at $1600 per mo. Until jan. Of 2007. Some of the features include 11 foot ceilings, beautiful upgraded hardwood flooring, stainless steel appliances, upgraded granite counter tops, and more! You must see to appreciate this amazing unit!

HOA Dues: $312------------------Let's look at some numbers here on this "Perfect opportunity". Lets say a 'genius' investor wheels and deals and gets a 'steal' on this property at $450,000. Lets say they have $90,000 for the 20% down. Their mortgage payment on a $360,000 loan with a 6.25% 30 year fixed will be $2,216 per month. Throw in another $375 per month in property taxes (this is a low estimate using 1% of the purchase price), and $312 for HOA, and you are looking at a grand total of $2903 per month. I know, I know...you could put less money down and get an I/O or option-ARM mortgage and lower the monthly payment. This MIGHT get you to break even in the short run, but that is about it.

SO, you spent $90k for the 'privilege' to lose $1303 per month (yes, I know I'm not figuring in the tax picture...but I'm also low balling taxes and not adding in insurance). If you don't see a problem with this 'investment' then I think your math and economics teachers did you a real disservice. See my post titled A population bankrupt in math.

See what I'm talking about?!?!? I have about had it with stupid people meddling around in the financial/mortgage industries. The sad thing is that somebody will probably be convinced this is a 'great' opportunity. They will crunch the numbers using a low 'teaser' payment that is interest-only or an option-ARM. I don't see how anybody with a brain and/or any integrity could say something as stupid as 'Perfect opportunity...'. Oh that's right...it IS a 100% commission business. Do or say whatever is necessary to 'close the deal'....right???

Lets get back to our 'road' so to speak. We are experiencing the increasing inventories at this time. The next step will be the eventual decline in prices. This will happen when people have to sell. People don't seem to have a problem with 'making' 50-100k in equity when a property down the street sold for more. How do you think they will handle it when it goes the other way? What happens when the people that bought many years ago decide to sell and move away. They don't need top dollar because they bought their 700k home for 150k a long time ago. They can 'take' 550-600k and be happy. What happens to the comps when houses start selling for less? I don't know how the banks will handle it, we have never had 100% financing and this much 'funny money' sloshing around in such a short period of time. What is going to happen when you have thousands and thousands of people upside down on their homes? What is going to happen when the interest only period ends, the ARM adjusts, or the neg-am option ARM recasts...and the person cannot refi because the latest comps are less than what they currently owe?

Here is my prediction: I think San Diego will see 1000+ condos on the market in downtown, and 30,000+ properties on the San Diego MLS by then end of 2007. The only thing that will keep those numbers from happening is some rather large reductions in prices.

We will see how close my predictions come. Be patient people...this thing is going to get REAL interesting in 2007 and take YEARS to really play out. Save money, be patient, and be informed.

Here are a few quick things I wanted to put out there for you...

I was in a shopping center last week running some errands. All of a sudden I heard somebody calling my name. I turned around and recognized the face, but I could not immediately place the name. It was one of the loan officers from one of my old broker shops. Apparently things were getting pretty slow, and the owners were trying to 'steal' loans and close them themselves to get paid. The days of there being 'so much business I can throw a few loans to the newer people' are over. That is not the funny part, the funny part is that this loan officer was back to running two cell-phone kiosks at the local shopping centers. I know people have joked before about what all these loan officers are going to do when things slowdown, well, I guess this is how one LO was going to handle things. They also told me that of the 20+ loans they had in their pipeline, they were only able to get 2-3 to actually fund. They got into the business for the 'big money', but were a tad late to the party along with thousands and thousands of others. "Would you like an option-ARM or interest only?" is now replaced with "Do you want a bluetooth headset with that???".

But don't despair, Accredited Home Lenders doesn't see things going the other way. They just dropped a cool million dollars for a 3-day 'sales rally' in San Diego. They flew in every sales rep in the company, put them up in the Manchester Hyatt downtown, gave them all a $100 pre-paid 'credit card', and had entertainment planned each night at such venues as the House of Blues. I have a few friends that work for them in several areas of the country. They called to let me know they would be in town. They pretty much feel the same way I do about things, but they are sticking things out for a while longer. They told me of the 'million dollar' tab for the 3-day event, as well as some of the rah-rah-rah that was being used to pump everybody up, and keep them motivated. I'd like to see the 5 year reunion of this event, and see how many of the same people are still around. The loose credit has to tighten up and so will the entire mortgage industry when that happens. You can only lend money to people with spotty credit at high LTV/CLTV's when the markets are rising. It is going to be interesting so see how the industry copes with the eventual price drops as inventory keeps increasing at a rapid pace. Just remember, 2007 is the year when a majority of the 2 trillion dollars of adjustable rate mortgages do their thing...adjust!

So, there you have it for now. I will do my best to post more frequently.

I look forward to the comments and feedback.---I am going to keep making my posts over here, but most of the comments are happening at the new site. Go to...www.housingbubblecasualty.comorwww.anotherf@ckedborrower.com...if you would like to see more comments and activity. Don't forgot to check out the activity in the FORUMS!

10 Comments:

Anonymous said...

Nice post. I read this morning that margin loans against stock portfolios are increasing. The unique twist is that rather than using the money to buy more stock they are using the money to fund their life. I wonder where they are spending...

A margin loan from a stock broker typically runs about 10% these days. I guess it is better than some credit cards. Or maybe they already maxed out their credit cards and this is the last loan balance they can find.Not good.

scm guy - thanks for the update, classic story about the loan officer working weekends at a mall!

did you see this week's news on ECR (Encore Mortgage in Irvine)? more layoffs and the two CEO's are now working for free (no salary). looks like that bucket shop is about to close up. also, another OC subprime bucket shop actually did close 2 weeks ago - Acoustic Mortgage (great name huh? no wonder they went under!)

fyi - i live in a 3 yr. old tract in Irvine, new for sale listings are exploding here over the last month! nothing's selling!

A good 70-80% of the buyers the past year or so have used 'hocus pocus' loans to 'afford' their property.

What happens when they have to make a REAL payment on the property and not some interest only, neg-am, or teaser payment??

I saw it day in and day out...and you can't begin to imagine how happy I am to be OUT of that industry.

People were commmitting financial suicide everyday, but nobody wanted to think into the future. I had friends that laughed at me when their 'investment' property in arizona went up 80k in a few months. I cautioned them about buying before they did...so in the short term, they were 'right'.

With over 40,000 properties on the market there now, and not 11,000...I haven't heard a peep from them. Just like the .com stocks having big days...property had its big day.

Even though it is hard, enjoy NOT being in debt, and just keep saving money and being informed.

I'll buy when it makes sense...until then, I will enjoy having money in savings and a positive net-worth.

I came across a nice presentation by Christopher Thornburg, a senior economist of the UCLA Anderson Forecast. I think he wraps the current state of matters in California quite nicely. It's a rather long (59 min.) presentation, but well worth your time. I really urge everyone to watch this: